Question

Sam and Sue Sellers and Jill and Jim Jackson were all in the building trade. Sam had been operating as a sole trader who employed Sue, his wife. Jill and Jim had been operating as a partnership.   The two couples were good friends and often socialised together.

During an evening out they were discussing the problems of liability in the building industry and decided to form a company. The company was registered with the name Bespoke Builders Ltd on April 1, 2017 for convenience for tax purposes without adopting a constitution. The shares were issued at $1.00 per share.

At registration of the company
The shareholders & share holdings were:			The Directors were:
Sam Sellers             Sue Sellers                 Jim Jackson            Jill Jackson Total Shares	1,000    500 1,000 1,000 3,500		Sam Sellers Jim Jackson

The company did very well in its first year. At the general meeting at the end of the year it was noted that the company would be more competitive on price if it had its own architects. The board agreed to look into the possibilities of bringing architects into Bespoke Builders Ltd’s business.

Sam and Sue had two good friends, Michael Mint and Peter Parsley who were architects. In May 2018 Sam Sellers and Jim Jackson began negotiating with Michael and Peter on joining Bespoke Builders Ltd as shareholders and employees. One of the obstacles to Michael and Peter joining the company was the costs involved in integrating their business into Bespoke Builders Ltd. After lengthy discussions regarding the merits of funding this through debt or equity the board agreed that a further 2,000 new shares would be issued. Michael and Peter would take up 1,000 shares each, the issue price of which would be $2.50 per share to reflect the increased value of the company. The shares would rank equally with the existing shares and the funds would be applied to purchasing the necessary architectural equipment and computer design programmes that Michael and Peter would need.

It was also agreed that Michael Mint would be appointed a director and that the name of the company would change to Bespoke Design & Build Ltd. The name change took effect in September 2018.

After the changes
The shareholders & share holdings of Bespoke Design & Build Ltd were:			The Directors were:
Sam Sellers             Sue Sellers                 Jim Jackson            Jill Jackson Michael Mint Peter Parsley Total Shares	1,000    500 1,000 1,000 1,000 1,000 5,500		Sam Sellers Jim Jackson Michael Mint

By January 2019 Bespoke Design & Build Ltd was benefitting from the Government policy to build more houses in Auckland and the small premises that the company was operating from were no longer adequate. The assets of the company at that time were valued at $750,000 and its projected earnings for 2019 were $2,000,000.

Sam and Jim believed that it would be appropriate, as a building company, to look for premises in a cheaper industrial area. They believed that the company could purchase suitable premises for under $400,000. Michael on the other hand, thought that the company’s image would be better presented if the new premises were in a smart, new, commercial area where property prices were much higher. It was becoming apparent that Jill Jackson, who had just completed an architectural degree and whose relationship with her husband, Jim, had broken down, would support with Michael and Peter if the matter went to a vote at a general meeting.

Sam Sellers and Jim Jackson, concerned that control of the company was slipping out of their control, propose to put a resolution to the next board meeting to issue 1,000 new shares at $0.50 per share to each of the shareholders who originally established the company.

Question 1:                                               20.0 Marks

Directors’ Duties – ILAC Question

Cite any relevant principles of common law or equity, case law and sections of the Companies Act 1993 in your answer.

Please advise Sam Sellers and Jim Jackson the legal implications on their duties as directors if they were to proceed with issuing the 1,000 new shares to each of the shareholders who originally established the company.

Answer 1